The Great Train Wreck Revisited

Last week's piece on the dysfunctional situation with Anheuser-Busch, Maletis Distributing and 10 Barrel drew a firestorm of traffic here. I suppose a lot of people enjoy seeing big beer flounder. The post was shared on a few sites and attracted some comments, some of them fairly naive.

It turns out some people out in the national audience don't understand the situation on the ground here in Portland. They also don't understand the concept of branch distributors and why Anheuser-Busch wants all of its brands to run through those wholesalers.

Maletis, Craft and Portland 
One of the more interesting comments came from someone who thought I was drastically underestimating the value of the AB portfolio to Maletis. The implication, of course, is that Maletis would be DOA without all those great AB products.

I actually explored this issue a while ago. After looking at IRI data (tracks beer sales in grocery chains) and talking to some industry folks about draft sales (not part of IRI), I concluded craft's share of the Portland market is greater than 60 percent.

Actual IRI data puts Portland's craft share at around 45 percent. But IRA does not track sales at specialty stores like New Seasons and Whole Foods, or at bottleshops like Belmont Station, Tin Bucket and Beermongers. When you extrapolate for what's missing, you quickly realize craft's share is in the 60 percent range, at least.

Draft is a harder nut to crack. But Portland is a huge draft city. The national average for draft consumption is around 30 percent. Industry sources told me it's 50-60 percent by volume in Portland, greater than 60 percent in dollars..and growing. That's fairly shocking.

Something to keep in mind is the overall numbers look a bit different outside Portland's core. Yellow beer retains a greater following in suburban and rural areas, and Maletis does distribute there. They surely have greater success with their AB book out there. I admit it.

Nonetheless, the dollar volume within Portland's core suggests the Maletis craft portfolio is worth more than the AB book. Could they survive if they lost their AB portfolio? Tough question. Perhaps more importantly, could they survive without their craft portfolio? I bet not.

Branch Distributors vs Maletis
Another of the more interesting comments concerned the issue of why Anheuser-Busch would want to move 10 Barrel to a branch distributor, in this case Western (formerly Morgan). I mean, Maletis already distributes AB products. Why not just let them hang onto 10 Barrel?

That viewpoint completely misses the point of owning distributors and buying up craft brands. Anheuser-Busch has a history of leveraging every possible advantage. In fact, an AB sales exec recently said he wants all of their owned brands handled by branch distributors. Any other arrangement, he said, is unacceptable.

You need to read some of my earlier posts if you don't understand why AB wants it this way. It isn't strictly about the small percentage they're losing when an independent like Maletis sells a brand like 10 Barrel. It's much more about control and leverage.

Buying distributors and craft brands is part of a vertical integration strategy that AB naturally denies it's pursuing. But we know how it works because we've seen it in action here in Oregon and in other places around the country.

After acquiring Goose Island, AB pushed distributors to heavily discount kegs of Goose as a means of undercutting craft brands and winning tap handles. A lot of independent distributors balked. There's very little skin in it for them. But branch distributors have no choice. They have to tow the company line. This is why the AB brass wants their brands handled by branch distributors.

The fact that Maletis is holding onto 10 Barrel and distributing it within Western's territory is comical. The big shots in St Louis must have steam rolling from their ears and noses. They could fix the problem by paying Maletis for the rights to 10 Barrel. But they refuse to do so. Why? Because they already paid for that goddamn brand!

Such a marvelous little train wreck.

The Impending Train Wreck Over 10 Barrel

As train wrecks go, some are more entertaining than others. That's especially true when there's a trainload of bullies on one side of the track and some more or less regular folks on the other. When you see the bully train jump the track and crash, it's a good feeling. Admit it.

Well, there's a nice little train wreck brewing right here in Portland. It involves our old friends, Anheuser-Busch, along with Maletis Distributing and 10 Barrel Brewing. Not a love triangle, exactly. The dispute is over who will distribute 10 Barrel in the Portland area.

You may recall that 10 Barrel was purchased by AB last year. The intended outcome of that purchase was that 10 Barrel brands would be distributed by AB-owned Western Distributing in this area. The problem is, Maletis owns the franchise rights to 10 Barrel here.

Keep in mind that Maletis is what's known as an independent AB distributor. That means they distribute the normal line of AB products within their territory. They own franchise rights within that area, just like they own the rights to 10 Barrel there, purchased long ago.

Another thing you need to know is that franchise laws are on the stiff side in Oregon. That essentially means a large national company can't simply come in and unilaterally revoke contracted rights to sell their products. They would have to show cause for that action..or buy the rights back.

There's more. If franchise rights are stripped without cause or compensation, the injured party can sue and receive triple damages. So doing something stupid or flippant can be costly in these situations. Not that anyone involved in this case is stupid or flippant.

This is a nice reminder that brewery acquisitions can be messy. Aligning distribution rights can be a challenge. When AB bought 10 Barrel, it surely assumed acquiring the rights from Maletis would be a slam dunk. That might have been done by swapping brands. But Anheuser-Busch has nothing to swap that Maletis wants or needs. They'd prefer cash.

Apparently, the folks who brew "The Hard Way" have not made Maletis an acceptable offer. So Maletis continues to distribute 10 Barrel brands in the area where it has the rights to do so...an area that extends into Western's territory. Needless to say, the brass at AB are incensed. They want their brand. And they want it now!

There's a bit of a back story here, which is that Anheuser-Busch has been unhappy with Maletis for a while. They don't like the fact that Maletis has built a broad craft portfolio. That kind of thing detracts from the corporate montra, which is to move red, white and blue product. Maletis is rumored to have been told its days as an AB distributor are numbered.

The plain reality is that Maletis just doesn't get along with its cranky Uncle Bud. They've put up with him for convenience sake for a long time. But they aren't compelled by law to hand over the rights to 10 Barrel or any other brand unless they feel the price is right. And so far the price has not been right.

Anheuser-Busch's response? Because they've been unable to hammer out a financial deal, AB plans to withhold two new brands they're rolling out. Maletis won't receive them. Who knows what other punitive measures might be in play. Always use the stick if you're stingy with carrots.

This seems a dubious move. These new brands aren't going to have significant traction here. Maletis will simply hang on to 10 Barrel until it gets the price it wants. If it's true that Anheuser-Busch wants to end Maletis' run as an AB distributor, those rights will also have to be bought back.

What we have is an escalating conflict caused to a large extent by the growing power of craft beer. AB is trying to expand its craft portfolio because its own brands are in freefall. Maletis has a nice craft portfolio and doesn't feel inclined to be a subservient partner with its cranky uncle.

This train wreck is gonna be a hoot.